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(Aug 27): “The current monetary policy stance seems adequate and provides room to accommodate a temporary increase in inflation,” the OECD said in its Economic Survey on Malaysia published Tuesday. “At the same time, monetary authorities should stand ready to raise rates to counter possible second-round effects from higher energy prices,” it said.

While Malaysia’s inflation has stabilised around 2%, there are “significant risks” around the price growth trajectory that warrants caution, according to the OECD. The report comes as easing price pressures in countries including the US have given central banks the scope to start pivoting to rate cuts. The Philippines reduced borrowing costs from a 17-year high earlier this month while Indonesia and Thailand have signalled openness to loosen monetary settings.

The inflation trend in Malaysia depends a lot on the pace of subsidy removal, which explains why it faces the risk of further monetary tightening unlike its peers. This too, as the inflation effects of the subsidy withdrawal are highly uncertain, according to the OECD.

Prime Minister Datuk Seri Anwar Ibrahim allowed diesel prices to float in June in order to strengthen government finances. He intends to do the same with the more heavily subsidised and most widely used fuel RON95. The move could potentially increase inflation by 3.05 percentage points, according to calculations by RHB Bank Bhd analyst Chin Yee Sian, who expects the government to push the RON95 subsidy removal to end-2024 at the earliest.

Malaysia increased its key rate by 125 basis points over a one-year tightening cycle that started in May 2022, taking the overnight policy rate to 3% from a record low 1.75% during the pandemic. The statutory reserve requirement that was also cut during the height of Covid-19 has remained well below pre-pandemic levels.

In the best case scenario, removing energy subsidies could increase inflation temporarily, said the OECD. But there could also be more enduring second-round effects and more widespread upward pressures, it said.

“Against this background, it is important to avoid a premature easing of the monetary stance and to respond quickly to any inflationary pressures that could result from the planned reform of subsidies,” the OECD report said.

Source: The edge markets

Korea's central bank chief on Tuesday defended the bank's latest rate freeze decision, saying that the level of household debt is inching toward a point that can cause an economic slowdown and a potential financial crisis.

Last week, the Bank of Korea (BOK) held its key rate steady at 3.5 percent for the 13th straight session due to soaring home prices but opened the door for a policy pivot this year.

"We judged that a rate cut can further stoke home prices and increase the volatility in the currency market," BOK Gov. Rhee Chang-yong said at a forum.

There have been various opinions over the central bank's rate freeze decision, but at the moment, policymakers should review why the central bank should hesitate in slashing the key rate in the face of high household debt and soaring home prices, Rhee said.

The central bank's rate freeze decision is intended to highlight the dangers of such a vicious cycle of excessive demand in some areas, namely the posh Gangnam district, according to the central bank chief.

"We are at a point where we could face an economic slowdown if household debt further increases and must brace for a potential financial crisis," he said.

Last week, the central bank said inflation has continued its downward trend and the recovery in domestic demand has been modest.

But it still needs to further monitor how recent measures over the housing market are affecting home prices in Seoul and its surrounding areas and household debt.

The rate freeze came as household debt runs high in the face of a series of lending rate hikes and with tighter lending rules and inflationary pressure in Asia's fourth-largest economy showing signs of easing.

Rhee stressed that rising household debts and home prices should be dealt with immediately to ensure financial stability.

"Household debt should be considered for financial stability, and most board members see the need to curb rising real estate prices," Rhee said in a press conference last week. 

Source: Korea times